Bangko Sentral ng Pilipinas (BSP). RYAN LEAGOGO/INQUIRER.net FILE PHOTO
The Bangko Sentral ng Pilipinas (BSP) yesterday reaffirmed its commitment to sharply reduce the cash buffer that financial institutions are required to keep immobile in their vaults amid rising clamor from bankers for regulators to release more liquidity to feed the growing economy.
In a message to reporters on Thursday, BSP Governor Nestor Espenilla Jr. said the so-called “reserve requirement ratio” (RRR) has become an outmoded way of managing the amount of cash circulating in the financial system and, as such, needs to be reformed.
“The reserve requirement ratio is one of the traditional monetary policy instruments available to BSP. We have heavily relied on it for a long time to run effective monetary policy in a situation of underdeveloped banking and financial markets and limited central bank open market operation tools,” he said. “This is no longer the case for the Philippines.”
Current regulations require banks to keep 20 percent of their deposits in their vaults, preventing their productive use as loans or investments. This policy is a tool that helps the central bank to control the amount of liquidity in the economy while providing banks with a ready cash buffer for large client withdrawals.
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Since assuming the governorship of the central bank last year, however, Espenilla has made it clear that his preference is for the reserve requirement ratio to be cut to single-digit levels.
“Continued heavy reliance on RRR has become highly burdensome and distorts the financial system,” he said yesterday, explaining that the central bank now has a more effective and market-friendly tool for managing liquidity in the form of the so-called “interest rate corridor.”
